9911796707
TMI Blog2011 (6) TMI 140X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant material facts are like this. The assessee, a joint venture between an Indian company by the name of Mahindra & Mahindra Ltd. and a UK based company by the name of British Telecommunications, is engaged in the business of software services relating to telecommunication, internet technology and engineering etc. During the assessment proceedings, it was noticed that the assessee had allowed credit to its US based associated enterprises, beyond the stipulated credit period. It was in this backdrop, and pursuant to a reference made by the Assessing Officer to the Transfer Pricing Officer for determination of arm's-length price, on account of notional interest relating to excess credit period granted by the assessee to its AEs, that the assessee was required to show cause as to why interest at the rate of 10 per cent not be treated as arm's-length interest for such delayed receipts on account of services provided to the AEs. The stand of the assessee was that excess credit period was allowed to the US AE in view of the liquidity problems faced by the AE, and that, in any event, no such interest is charged from even independent enterprises. It was also submitted that interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled Price (CUP) method, but, in doing so, he apparently overlooked the fact that to be an internal comparable under the CUP method, the transaction has to be with an independent enterprises. Rule 10B(1)(a) specifically provides that, as a first step for determining the Comparable Uncontrolled Price "the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified [Emphasis supplied]". Rule 10(a), in turn, defines the expression 'uncontrolled transaction' as 'a transaction between enterprises other than associated enterprises, whether resident or non-resident'. It is thus clear that a transaction between the associated enterprises cannot be taken as a comparable for the purpose of application of CUP method. Internal CUP, therefore, can only be a comparable transaction which the assessee enters into with an independent enterprise, while it will be an external CUP when the comparable transaction is between two independent enterprises not involving the assessee. Accordingly, a transaction admittedly with an associated enterprise of the assessee company cannot be taken as an internal compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stand of the Transfer Pricing Officer is, therefore, devoid of any legally sustainable merits. As a matter of fact, in case the Transfer Pricing indeed wanted to adopt internal CUP in this case, it would prima facie appear that the correct comparable was the interest that the assessee was charging from independent enterprises - which was admittedly NIL in the present case. It is only elementary that an ALP adjustment can only be made to nullify the impact of interrelationships between the associate enterprises, i.e., for variations in assessee's dealings vis-à-vis dealings with independent enterprises, and, therefore, when assessee is not charging the interest on delayed payments from independent enterprises, a view is perhaps possible that the assessee cannot be subjected to the ALP adjustment in respect of delayed payments from associated enterprises either. In other words, the TPO need not consider what must happen in ideal circumstances but need to restrict himself to locating the differences in assessee's dealings with AEs vis-à-vis assessee's dealings with non-AEs, and neutralize the impact of such differences. However, right now we are not concerned with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India) and the LIBOR (London Inter Bank Offered Rate). The co-ordinate Bench held that "once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transactions", and accordingly proceeded to take into account interest rate in terms of LIBOR basis. We have adopted the same approach by taking into account the commercial principles and practices with regard to a US Dollar denominated extended credit for arriving at the benchmark rate, and take LIBOR as the base. Accordingly, the LIBOR (US Dollar) has to be as benchmark for US Dollar transactions - rather than the rate of interest on domestic borrowings, even which is lower than the interest rate of 10 per cent taken as ALP by the TPO, or, for that purpose, rate of interest on any other currency loans. Having said that, we may also reiterate that as we hold so, we are not giving any decision on whether the ALP adjustment can be made, on the basis of LIBOR plus mark up, in respect of extended credit because we are dealing with a very ..... X X X X Extracts X X X X X X X X Extracts X X X X
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